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Value creation in circular business models

Bringing circularity to your business can be appealing, but before going down this road, it’s important to know how to create value in a circular business model. Fortunately, business models in a circular economy offer a wider selection of value creation approaches than in linear value chains. The reason is that, instead of simply relying on consumption, value is created based on the use (1). Focus is shifted from a single use cycle to resource recovery and multiple use cycles to preserve the value of the products, materials and parts as long as possible. Additional life cycles are created to enable even more possibilities for valorisation.

From a product perspective, the circular economy (CE) represents an extension of life cycle-oriented innovation in which products are designed, managed, and evaluated along the entire value chain from resource provisioning to recovery (2). Product circularity covers slowing, narrowing and closing the loops, following the 4R frameworks with the main technical loops of repair/maintain, reuse, remanufacture, and recycle (2). This leads to specific arrangement of loops and their interaction along the value chain.

To achieve multiple value creation, a number of stakeholders from various CE system levels must work together in a collective and interorganisational way (3). New and diverse value networks for cycling resources and parts must be created. Value chain actors must collaborate to secure viable links between them, for example, to deliver a constant quality and quantity of secondary raw materials (SRMs). SRMs are technically the materials that can be recycled and then injected back into the economy as new raw materials (4). They are typically obtained either from production waste or from End-of-Life products, sent to recycling plants at the end of their lifespan (5).

Additional value streams can be created by offering customers a service based on your product. In a linear economy, producers and manufacturers are focused on selling products and parts in one-time transactions (6). In this way, consumers become owners of the product and have no additional relationship with the producer. Companies thus try to sell as much of their product as they can, sometimes at the expanse of the product’s quality.

Plastic granulates in the remanufacturing process. (Adobe Stock Photo)

Product-as-a-Service

In circular business models, however, the revenue streams can be captured multiple times throughout the lifecycle. Providing services to a customer instead of merely selling a product is one of the key strategies of value creation in the circular economy. Product-as-a-Service (PaaS) or Product-Service Systems approach offers several possibilities of combination of products with services (6). The product can still be sold to a customer, but additionally, service is offered during the usage of the product, either maintenance and repair or consumables, like refills for the copying machine. Another option is to change the ownership: rather than selling it, the product is rented or leased. Again, services like maintenance, repair and provision of consumables can be additionally offered to the customer. In this way, the customer can return the product back to the seller, who can then create additional value by repairing, recycling parts or remanufacturing (6).

PaaS approach enables producers to become more sustainable. Because they still own the product, they can influence its design to make it easier to refurbish and give it a second life (6). When the customer wants to return the product, the producer can pick it up and reuse its parts or materials for re-building it (6). In such a way, the product is kept at the highest value for the longest period of time, which increases profitability in the long run. Many industries have already adopted this approach: from consumer electronics and goods, furniture and original equipment manufacturers to medical and mobility (6).

The third PaaS option is oriented towards the result provided by a service. In this scenario, the service provider understands the needs of the consumer and supplies product(s) necessary to address this need. The seller provides the function of a product. For example, instead of offering customers a power generator, electricity is provided. This enables companies to switch towards the circular economy by offering their customers the tools to address their needs. Customers have advantages from the PaaS model as well: flexibility to pay/upgrade their payment options every month, more customer support and loyalty from the company, lower upfront costs to buy a product, and the possibility of getting renewed products once their subscription is over (6).

Creating value by changing the loops

A circular economy approach maintains value also by using the smallest possible industrial loops. A shorter loop usually reduces labour and energy costs, so more value is retained in the final product because the savings and possible benefits are more abundant than the goods produced in longer loops (7). For example, a product retains more value from repair and maintenance than from the recycling of its components. Additional value is created if a product re-enters the cycle or it’s use is prolonged.

A cascade loop is created when a product or component is used across different product categories. For example, wool can be used in a first loop for clothes, then for car seat filler, and ultimately for insulating. Value is created by the difference between the cost (including the embedded costs) of a virgin material, and the marginal costs of the material that is brought back into a loop for repurposing (7). In so-called pure cycles, value creation is already planned in the design phase, by ensuring that the product is easily dismounted and made of non-toxic materials (7).

Wool used for insulation. (Adobe Stock Photo)

From the technical point of view, products should be maintained and repaired to keep them in circulation as long as possible (1). A second hand market should be created and optimised for the reuse and redistribution of goods, including also quality control and consumer guarantees (1). Materials and parts should be recycled and reused in new production processes. In biotic cycles, on the other hand, value is created mainly through cascades, like in biorefinery. The biorefinery principle enables the extraction of multiple valuable materials from biomass, like high-value chemicals (i.e. pigments, phytopharmaceuticals), materials, energy or biofuel. Renewable energy can be supplied by biogas, produced through anaerobic digestion of organic materials (organic waste, agronomy residuals, etc.) in biogas plants (1).

Sources and further reading:

  1. CIRAIG — The Circular Economy Working Group of the International Life Cycle Chair (ILC Chair) (2015): Circular economy: A critical literature review of concepts.
  2. Hansen EG, Revellio F (2020): Circular value creation architectures. Make, ally, buy, or laissez-faire. Journal of Industrial Ecology 24:1250–1273; DOI: 10.1111/jiec.13016
  3. Tapaninaho R, Heikkinen A (2022): Value creation in circular economy business for sustainability: A stakeholder relationship perspective. Business strategy and the Environment 2022:1–13; DOI: 10.1002/bse.3002
  4. EC (2015): Closing the loop — An EU action plan for the Circular Economy.
  5. JRC — Raw materials information system.
  6. Quijano C (2020): What is Product-as-a-Service (PaaS)?
  7. EMF (2014): Accelerating the scale-­‐up across global supply chains. Ellen MacArthur Foundation.

This article was written by Dr. Maja Berden Zrimec, Head of Research and Content Writer at Anteja.

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